Interview: Project Pipeline Pushing Profits For FREETECH

ANOTHER KEY road operation and maintenance deal for Freetech Road Recycling Technology (Holdings) Ltd (06888) is helping spread its business across the country, management told Asia Fund Space.

The Hong Kong listco announced this week that Freetech Road Recycling -- an indirect wholly-owned subsidiary of the company -- and a JV partner entered into a JV contract to establish a public-private partnership (PPP) company in Jurong City, Jiangsu Province with a registered capital of 100 million yuan.

The PPP company shall be owned as to 80% and 20% by Freetech Road Recycling and the JV partner, respectively.

The scope of business of the PPP company includes investment, construction, operation and maintenance of the municipal infrastructure, road construction and maintenance project, project management, and leasing of construction engineering equipment, with the PPP company to be responsible for the project.

Asia Fund Space: You will own 80% of the JV.

Is this an optimal percentage ownership? What percentage is ideal? And how do you typically decide what percentage ownership to pursue?

Freetech Road Recycling Technology CFO Mr. Anson Lim:  For PPP projects, normally private enterprises will own the majority shareholding.

The percentage ownership that we pursue is decided case by case but we will own more than 80%.

Asia Fund Space: This contract deals with "public roads."

Which is more desirable for Freetech, Public or Private roads? And which is easier to win bids for?

Furthermore, which is typically more profitable?

Mr. Anson Lim:  In China, the road industry is divided into three categories: city roads, highways and expressways (toll roads).

According to our experience, city roads are more profitable due to the roads having more intersections, thus it is more complicated when we perform road maintenance and we will charge higher prices.

In contrast, highways and expressways are straight forward, and it is easier when we perform road maintenance.

We will bid for PPP projects for city roads, highways and expressways as long as it is profitable.

Although all of the PPP projects have to go through a bidding process, but once we have pursued the customer to use our technology, we can win the bids through setting some of our unique technology requirements.

Asia Fund Space:  The contract is for six years. Is this average? And what is the optimal time?

Mr. Anson Lim:  The length of the construction period of this project is about one year while the payment duration of this project is about five years.

This contract is short due to the investment amount (contract size) being somewhat small (100 million yuan).

Normally, the length of the contract of PPP projects is about 10 years or more for larger contract sizes as more maintenance work is involved.

For larger sized PPP projects, the length of the construction period and payment duration depend on the contract size and negotiations with the local government.

Asia Fund Space: What are the main benefits of a PPP contract model?

And are you pursuing this model type going forward for most projects?

Mr. Anson Lim:  The reason that we will pursue PPP contract models in the future is because: (1) We can obtain large amounts of road maintenance contracts; (2) We can secure the road maintenance project for one city or district for longer time; (3) Although the payment period is longer, but the payment is more secured as more guarantee will be provided by the local government, such as land, portion of the yearly budget is reserved to settle the PPP project, financial bureau guarantees, etc.

Asia Fund Space:  Can you provide any updated first half-year financial guidance at
this point?

Mr. Anson Lim:  The interim results will be released this Friday night.

Freetech Road Recycling Technology is a leading integrated solution provider using the Hot-in-Place recycling technology in the asphalt pavement maintenance industry renowned for its Road Doctor brand. As of 31 December 2015, the Group owned 111registered patents and had11pending patent applications in Hot-in-Place Recycling Technology and related equipment. The Group has also established 11 joint ventures and associates and appointed 12 franchisees across China including Hunan, Inner Mongolia, Jiangsu, Fujian, Xinjiang and Guangdong in order to expand its customer base across the country.
 
(Note: This story is contributed by Andrew Vanburen. Mr. Vanburen has served as a
government official focused on international trade at the American Institute of Taiwan in
Taipei, and worked in financial journalism for nearly a decade in both Beijing and
Shenzhen. He holds a Master's Degree from New York University. He is currently Director at
Hong Kong-based Asia Fund Space. For more information, please visit:
www.asiafundspace.com)